August 4, 2017

Daily Observations:

Asian equities were mixed earlier today as investors await the monthly US nonfarm payrolls report due later tonight. The US dollar weakened following a report that US Special Counsel Robert Mueller was said to have impanelled a grand jury in the ongoing Russia probe. Both the BOE and RBA lowered its forecasts for economic growth.

Geopolitics / Trade Wars:

• China would prefer peace, but is prepared for a trade war. With US officials reportedly readying a probe into alleged violations of intellectual property rights, Beijing responded by saying it pays “high attention” to the matter and wants to cooperate with the US. However, the world’s second-largest economy has countervailing measures to strike back should the Trump administration take action, including curtailing soybean imports. China’s leadership will be gathering in the coming days ahead of the Communist Party’s twice-a-decade congress this autumn. Meanwhile, a speech that Trump was scheduled to give on Chinese trade Friday has reportedly been cancelled.

US:

• According to the Wall Street Journal, Special Counsel Robert Mueller has impanelled a federal grand jury in his probe of Russia’s interference in the 2016 U.S. election and potential collusion with the campaign of now-President Donald Trump. Reuters reported that subpoenas have been issued related to the meeting between Donald Trump Jr., Russian lawyers, and other parties in June 2016. On Thursday, US Senators introduced legislation that would protect the special counsel from being fired by the president.
• As a precursor to tonight’s nonfarm payrolls, initial jobless claims for the week ending Jul. 29 was released last night and fell to 240,000 from 245,000 in the week prior, lower than the 243,000 predicted.
• The Markit services PMI for July rose to 54.7, from 54.2 in June; analysts predicted a reading of 54.2.
• The ISM non-manufacturing composite gauge last month slipped to 53.9, down from 57.4 in June and less than the median estimate of 56.9.
• Factory orders in June rose 3.0%, in line with expectations, and reversing from a 0.3% drop in May.
• Economists are looking for more of the same from July non-farm payrolls growth in the US, with 180,000 jobs added and the unemployment rate dipping to 4.3%. Wage growth will be as closely watched as ever. While the numbers will be released after the close of trading in Asia, they’re sure to set the tone for next week.
• The US dollar sold off slightly overnight following the release of a report indicating that Mueller has impanelled a grand jury as he investigates Russia’s interference in elections and possible collusion with the Trump campaign. The Bloomberg Dollar Spot Index closed 0.1% lower in New York, while the Dollar Index pared an earlier gain to end unchanged on the day.
• The Wall Street Journal report also led a fall in Treasury yields. The benchmark 10yr Treasury yield declined 5bps to 2.22%.
• The Dow Jones Industrial Average (+0.04%) recorded a seventh consecutive all-time high, however the broader S&P 500 Index (-0.22%) and the tech-laden Nasdaq Composite (-0.35%) declined.

Canada:

• Home prices in Toronto, Canada’s largest city, posted their biggest monthly drop in at least 17 years in July and sales plunged as government efforts to cool the market and the near-collapse of a mortgage lender made buyers leery. Three levels of government have introduced housing regulations since October that pushed out many potential buyers. The measures were seen as necessary to cool prices climbing at an unsustainable pace.

UK:

• The BOE kept rates at record lows yesterday and cut its forecasts for economic and wage growths. The central bank suggested that Brexit could be to blame for sluggish pay gains, and its outlook for activity could be further trimmed should the exit from the EU be anything but “smooth.” Ahead of the BOE’s release, the IHS Markit Services purchasing managers’ index pointed to “sluggish” growth for the UK. Britons’ pessimism on the economy has risen markedly since the snap election was called earlier this year.
• Services PMI in July rose to 53.8, from 53.4 in the prior month, exceeding the 53.6 expected. Composite PMI gained as well, to 54.1 from 53.8 over the same period, and surpassing the median estimate of 53.8.

Australia:

• The RBA reiterated its warning that a tearaway currency could undermine an otherwise improving outlook for employment and household income in its quarterly Statement on Monetary Policy Friday. The central bank lowered its forecast economic growth by 0.5% for this year to the range of 2.0%-3.0%, and by 0.25% in 1H 2018 to 2.5% – 3.5%.
• The RBA also highlighted risks of further gains in the currency, saying that a 10% appreciation would lower year-end inflation by a little less than half a percentage point in each of the ensuing 2 years. It sees solid employment growth in 2G 2017, and expects unemployment to edge down to under 5.5% by end-2019.
• Retail sales in June rose 0.3% month-on-month, slowing from May’s 0.6% gain but surpassing the median estimate of 0.2%.
• Property investors, who have helped stoke soaring home prices in Australia, are being squeezed as regulators impose restrictions to rein in lending. The nation’s biggest banks have this year raised minimum deposits, tightened eligibility requirements and increased rates on interest-only mortgages, a form of financing favoured by people buying homes to rent out or hold as an investment. The biggest banks have hiked rates on interest-only mortgages by an average of 55bps this year, according to Citigroup Inc.

Singapore:

• Singapore’s biggest developer, CapitaLand Ltd., detects signs that the city’s residential property market is “bottoming out” after a run of price declines, Chief Executive Officer Lim Ming Yan said.

Precious Metals:

• Spot gold erased its previous session’s decline to rebound by as much as 0.7% to $1,270.92/Oz last night. The precious metal failed to breach the $1,270/Oz resistance though, and should remain range bound between $1,260/Oz and $1,270/Oz ahead of the nonfarm payrolls report due for release later today..
• On a longer-term basis, spot gold is currently testing a key downward multiyear trendline, in play since 2011. An upward move above the $1,280/Oz handle should confirm the break above the trendline and signal the start of a reversal.
• According to a Bloomberg news report, even in its best month since February, bullion gained only 2.2% in July, and concern is mounting that rising interest rates may crimp further gains. That’s helping drive investors who want to continue owning the metal toward lower-cost funds. Bullion held by SPDR Gold Shares, the largest ETF backed by the metal, have shrunk to the smallest in more than a year, while holdings in the cheaper iShares Gold Trust are near an 8-month high.
• Global gold demand dropped to a 2-year low in the second quarter as reduced investment in ETFs products outweighed higher jewellery and bar purchases. Total demand slipped 10% from a year earlier to 953 metric tons, the lowest since the 2Q 2015, the World Gold Council said in a report Thursday. The decline was almost entirely due to ETF investors who cut buying by 76% from last year’s high level.
  
• Silver for immediate delivery rebounded as well, gaining 1.1% to $16.6613 earlier today.

Oil

• Crude oil futures expiring in September fell 1.1% to $49.03/bbl last night, and is poised for a weekly decline amid speculation rising US crude production will blunt OPEC-led efforts to drain a global glut.
• US oil output expanded to the highest level since Jul 2015, according to Energy Information Administration data Wednesday, while crude stockpiles fell less than forecast.
• The shale surge that’s tied down global oil prices shows no signs of abating, as 4 of the biggest US drillers said this week that they’re not backing away from lofty production targets for 2017. In second-quarter earnings reports, EOG Resources, Devon Energy, Newfield Exploration and Diamondback Energy all outlined goals that would help push US output toward a record 10 million barrels a day next year. The US drillers said they’re getting more efficient, allowing them to raise production goals without boosting spending.

Solar Energy:

• Home retailer IKEA of Sweden AB said it would start selling batteries for rooftop solar panels in the latest sign that once-costly storage technologies are becoming mainstream. The Solar Battery Storage system was announced in partnership with UK panel provider Solar Century Holdings Ltd. on Wednesday, providing potential savings on electricity bills by enabling users to use stored solar power when the sun is down and power grid costs are high.
• Tesla has completed its first solar roof installations, the company reported Wednesday as part of a second-quarter earnings report. Just like the first Model 3 customers, who took their keys last week, the first solar roof customers are Tesla employees. By selling to them first, Tesla says it hopes to work out any kinks in the sales and installation process before taking it to a wider public audience.
• The company has been adopting an Apple Store strategy for solar power since acquiring SolarCity Corp. last year for $2 billion. The idea is to cut down on the high price associated with actively identifying new customers, and instead attract them passively through its upscale auto stores in shopping malls and other high-traffic locations. Initial trials found the new approach was 50 to 100 percent more effective than at the best non-Tesla locations selling SolarCity products. Tesla halted SolarCity’s door-to-door sales earlier this year and is staffing up more than 70 stores for solar sales.

USDSGD:

• Spot 1.3582
• USDSGD slipped back below the 1.3600 following a weaker USD today. The pair gave up 0.22% to 1.3572 earlier.
• The support below lies at 1.3500, where the base of a double-top formation on the pair’s multiyear technical chart lies. However, a recovery back up to the resistance level of 1.3700 is more likely.

AUDUSD:

• Spot 0.7969
• AUDUSD erased Thursday’s decline to gain 0.6% to 0.7975 earlier today, following better-than-expected retail sales in June.
• The next resistance target resides at the 2-year high of 0.8164, while to the downside, 0.7875 is expected to provide support.

USDCAD:

• Spot 1.2570
• USDCAD slipped back below the 1.2600 handle and looks set to snap a 4-session winning streak. The pair was 0.4% lower at 1.2553 today, with investors bracing themselves for more volatility ahead of a jobs reports from the US and Canada, both due tonight.
• The pair has been well supported above the 1.2400 handle. A break above 1.2600 and the pair could extend its rebound higher towards the 1.2800 key resistance level. ,

USDCNH:

• Spot 6.7238
• The PBOC strengthened its reference rate by 0.12% to 6.7132 per US dollar earlier today, its strongest fixing since Oct 2016.
• USDCNH inched closer towards a 9-month low, having fallen 0.1% to 6.7206 earlier today.

USDJPY:

• Spot 110.11
• USDJPY retreated 0.7% to 109.85 earlier, reaching a 7-week low ahead of the much-awaited nonfarm payrolls report later today.
• The currency pair has since recovered above its 110 support. Further downside could be potentially capped by the base of a rising wedge pattern, established since April, at around 109.50.

GBPUSD:

• Spot 1.3138
• GBPUSD sank 0.9% to 1.3113 last night after the BOE policy decision disappointed hawks and was viewed largely dovish by markets. The losses in the pound remain capped however, due to a weaker US dollar today.
• Over a longer-term, the key support remains at 1.2800 while the important resistance target is at 1.3450.